How to manage cash flow in an economic downturn

__Cashflow is the lifeblood of any business, regardless of trading conditions or the wider macroeconomic environment. However, sound your business model, if your suppliers are demanding payment faster than revenues are coming in, cashflow will suffer. __

The challenges currently facing the UK economy have served only to intensify the cashflow pressures on British businesses. Soaring inflation – particularly sharply-rising energy and materials cost – has squeezed margins and made breakeven points harder to achieve. At the same time, widespread supply-chain disruption means many companies face significant delays not only in receiving stock and other inputs, but also in getting their goods out to customers. In both cases, cash position is put at further risk.

Creating a cash-focused culture

In this period of economic volatility, these issues must be addressed as a matter of urgency. It has never been more important to instil a culture of efficient cash management in your business: now is the time to focus resources on operational efficiency, with staff appropriately incentivised to drive sales, eliminate unnecessary costs and ensure business reporting is geared towards evaluating and sustaining the company’s cash position.

Crucial in this effort is the ability to have comprehensive, real-time visibility of the company’s cashflow status – but in today’s fast-moving and complex business environment, a spreadsheet-based, end-of-month approach to cashflow management simply won’t suffice.

Potential problems – from sudden rises in input prices or late payment of invoices – need to be identified on a daily, if not hourly, basis so the company can take swift action.

A better approach to cashflow management

The right digital cashflow-management tools don’t just help companies understand their cash position at any given point: they can also improve financial planning and optimise the way cash is used in the business.

Bespoke key performance indicators (KPIs) and scenario-planning tools can help you visualise critical data and identify issues that may arise in the near future, as well as assess the potential impact of rising prices or late payments. The tools can help model the bottom-line impact of sale price rises or sales volume fluctuations and can also highlight areas where action is needed, for example by seeking additional short-term funding.

According to Capify’s Q1 2022 Confidence Survey, just under 60% of SME owners are now worried about the impact of rising costs and inflation on their businesses. The survey also highlighted the impact of inflation on cash flow and cash reserves. Thirty-seven percent of respondents cited cashflow as a major concern (up 14pp from 23% in Q4 2021), whilst over half of the survey respondents (53%) were concerned about the levels of cash in the bank.

The SME specialist finance provider is seeing a significant increase in demand for loans to help meet this cashflow crisis, as traditional banks tighten their lending criteria.

Implementing more rigorous cashflow management systems and procedures can help in the ability to access bridging finance or injections of liquidity. By putting in place robust, data-driven forecasts, your business will be in a significantly better position to obtain finance by clearly demonstrating to lenders how additional capital will benefit operations, as well as how you will be able to meet the repayment schedule.

Resilient and ready for the future

From a more strategic perspective, businesses which instil best practice cashflow management now will be better able not only to survive the current downturn, but also to thrive when economic conditions start to improve again.

Agility is an essential trait in dealing with difficult trading conditions. The most successful companies will be those that can identify and react to problems quickly, while carefully monitoring the results of any remedial action to see what does and doesn’t work – and fine-tuning accordingly. At the same time, the introduction of an effective digital cashflow-management platform can drive collaboration between different parts of the business, for example sales, finance, and leadership. This can increase strategic alignment while also making the firm more agile and resilient, delivering a tangible competitive advantage as we emerge from the present crisis.

• Agicap’s state-of-the-art cashflow-management and forecasting software has revolutionised the way thousands of small and medium-size businesses track their cash, make cash flow forecasts, and create sustainable financial strategies. __To test Agicap : __

• Capify is an online lender that provides flexible financing solutions to SMEs seeking working capital to sustain or grow their business. To find out more about how Capify can help your business’ financing needs visit the Capify website.